Christine Lagarde: IMF May Need A BAILOUT

The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.

In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”

The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion.

The plan to increase the EFSF firepower is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone’s debt crisis spiralling out of control. It also includes a large-scale recapitalisation of European banks and a plan for an “orderly” Greek default.

Although Britain is not involved in the large-scale eurozone bail-out projects, it is liable for 4.5pc of IMF funding.

The plan, which would aim to build a “firebreak” around the indebted eurozone countries, emerged at the IMF annual meeting in Washington where global leaders united to demand urgent action from European politicians.

Despite the developments, traders warned that the failure of politicians to agree a solid rescue plan would result in more turbulence on global stock markets.

One trader said: “The expansion to the EFSF would be good, although it’s still not the eurobonds that the market has really been wanting to see. And, most significantly, it’s still only an idea, not a deal.”

In a G20 communique issued on Friday, leaders set a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.

However, already the plans to recapitalise European banks have been criticised in France – which has the biggest exposure to Greek debt.

The governor of the Bank of France, Christian Noyer, told reporters yesterday he didn’t “see any sign” that French banks were in trouble and that he believed there was “no need” for a recapitalisation.

But international pressure on European politicians has intensified.

Timothy Geithner, the US Treasury Secretary who proposed an increase to the EFSF at the Ecofin meeting on September 16, said that the sovereign debt pressures and banking strains in Europe were “the most serious risk now confronting the world economy”. Larry Summers, Barack Obama’s former chief economic adviser who was attending his 20th IMF meeting, said: “I have not been at a prior meeting at which matters have had more gravity.”

Demands for action were also made by emerging market leaders. Brazil’s finance minister, Guido Mantega, said European policymakers had a responsibility “to ensure that their actions stop contagion beyond the euro periphery”.

The governor of the Chinese central bank, Zhou Xiaochuan, said that “the sovereign debt crisis in the euro area needs to be resolved promptly to stabilise market confidence”.

With Greece facing a debt deadline at the beginning of October, the first priority is to release an €8bn tranche of bail-out money. Ms Lagarde said that the priority of international authorities this week must be “implementation, implementation, implementation” of the bail-out agreement of July 21.